Jem Developments v Hansen Yuncken [2006] NSWSC 1378 | Case summary

2349/06 JEM DEVELOPMENTS PTY LTD & ANOR V HANSEN YUNCKEN PTY LTD JUDGMENT 1 HIS HONOUR: On 4 December 2006 I delivered judgment and made orders on the plaintiffs' application to set aside a statutory demand served on them by the defendant (Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308). My orders were as follows: (1) order under s 459F(2)(a) of the Corporations Act extending the period for compliance with the demand, served by the defendant on the plaintiffs on 23 March 2006, up to and including 18 December 2006; (2) order that the originating process otherwise be dismissed; (3) order the plaintiffs to pay the defendant's costs as agreed or assessed. 2 When counsel for the plaintiffs foreshadowed an application for a stay of my orders pending appeal, or some similar orders, I granted liberty to apply. That liberty was exercised on 11 December 2006. Senior counsel for the plaintiffs informed me that his clients had filed a summons seeking leave to appeal from my judgment and orders, and then made a contested application for orders further extending the period for compliance with the demand, until the expiration of 7 days after determination of the plaintiffs' appeal by the Court Appeal. This judgment relates to the application for that extension of the compliance period. 3 As Barrett J observed in Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544, at [5], an application of this kind bears a close analogy with an application for a stay of execution pending appeal, and accordingly there are three matters to be addressed: "first, the general question of the prospects of success in the appeal and whether an arguable case has been shown; second, whether the appeal will be rendered nugatory unless the extension is granted [or, more broadly, whether there is a real risk that the applicant will suffer prejudice or damage, if the extension is not granted, which will not be redressed by a successful appeal]; and third, as to the prejudice the respective parties will suffer in the alternative eventualities". 4 I shall address each of these matters in turn. Is there an arguable case for success on appeal? 5 Senior counsel for the plaintiffs addressed the court at length on the question whether there is a reasonably arguable case for challenging my judgment and orders of 4 December 2006. It is unnecessary and inappropriate for me to review those arguments in detail or express specific views on the submissions that were made. For the purposes of this application for extension of the compliance period, it is enough for me to express my conclusion, which is that the plaintiffs have made out a reasonably arguable case for appeal, and to give my reasons in general terms. 6 One aspect of my judgment that the plaintiffs will challenge on appeal relates to the meaning of "offsetting claim" in s 459H. I noted (at [28]) that, while the cases have given a great deal of attention to the standard to be reached in showing that an applicant has an offsetting claim for the purposes of s 459H, little attention has been given to the meaning of the word "offsetting". Without purporting to attempt any general definition or to embark upon any comparison of the concept of "offsetting claim" in s 459H with the general law of set-off of claims, I held that it is open to the parties to a contract to stipulate that a particular payment obligation is to be performed separately from any rights of counter-claim or set-off, in a fashion that prevents any offsetting claim from being raised as a ground for setting aside a statutory demand based on the payment obligation. 7 The plaintiffs intend to argue that any contractual stipulation purporting to quarantine a particular debt from any reduction by counter-claim or set-off, however clear and specific it may be, does not prevent the court from concluding that the contractual counterparty has an offsetting claim under s 459H. They will rely on the broad definition of "offsetting claim" in s 459H(5), which extends to a cross-demand, "even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates". They will also rely on three cases that were not cited to me at the hearing of the application to set aside the demand: John Shearer Ltd v Gehl Company (1995) 60 FCR 136 (Full Federal Court); Pearson's Products Pty Ltd v CP Technologies Pty Ltd [1999] NSWSC 575 (Young J); and Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269 (Full Court of the Supreme Court of South Australia). Senior counsel for the plaintiffs told me that these additional cases were "only excavated from the plethora of cases dealing with statutory demands by accident". There is, however, no application to me to revisit my orders under the slip rule. 8 Counsel for the defendants submitted, correctly, that none of these cases was concerned with a contractual stipulation quarantining a debt and excluding any reduction by offsetting claim. The John Shearer case concerned a bill of exchange, and the scope of the rule of practice that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange (see at 140). Pearson's Products concerned a contractual provision to the effect that one party, Pearsons, acknowledged its debt to the other party, and irrevocably consented to the entry of judgment, if it failed to make certain scheduled payments. On its face, the clause did not purport to exclude the raising of an offsetting claim. Ozone Manufacturing concerned a claim for tax offsets for research and development expenditure. 9 Nevertheless, the cases have some relevance, in that they emphasise the breadth of the word "cross-demand" and make the point that it is not a technical term and should therefore not be given too restricted a meaning. In the Pearson's Products case Young J (as the Chief Judge in Equity then was) held (at [22]) that there does not have to be a set-off under s 553C in order for there to be an offsetting claim. That was relevant because the counterparty was in liquidation, but it also suggests that an offsetting claim might arise under s 459H where there is no entitlement to a set-off in contract or equity. 10 The plaintiffs' argument involves the proposition that the parties to a contract cannot effectively stipulate that an identified debt is to be quarantined from all offsetting claims and consequently is to be amenable to a statutory demand without reduction under s 459H(1)(b). That may prove to be a difficult argument to make, but it is not so implausible as to be rejected as beyond reasonable contention. 11 In my judgment of 4 December 2006, having reached the conclusion that the parties to a contract can agree to quarantine a debt from offsetting claims, I turned to the question whether, as a matter of construction of clause 2.1(2) of the settlement deed of 2004, the parties had done so in this case. I found that they had. I do not regard the construction that I adopted in my judgment (at [41]) as clear beyond all reasonable disputation. As the judgment explains (especially at [33]-[40]), my conclusion was based upon consideration of the literal language of the subclause, my perception of the commercial compact arising out of the language used, and my rejection of alternative constructions of the words used in the clause. These are matters on which reasonable minds may differ. Senior counsel for the plaintiffs has proffered an alternative construction that should not be rejected without careful consideration. 12 I understand that on appeal, the plaintiffs will challenge the view I expressed at [42]-[43], that the question of construction should be resolved by a decision to the normal civil standard, rather than merely by determining whether the plaintiffs' construction is supported by plausible contention. I took the view that my approach followed from the wording of s 459H(1)(b), which requires the court to be "satisfied" that the company has an offsetting claim. But as senior counsel for the plaintiffs pointed out, it is arguably unsatisfactory for the court to purport to resolve such a matter inter parties, in a fashion that may give rise to res judicata or issue estoppel, in a proceeding which is analogous to an interlocutory proceeding, and is not apt for exploring fully the evidentiary and contextual matters that might be adduced when a question of construction is raised for final determination in a pleaded case. This seems to me to be a matter open to reasoned argument. Will the appeal be rendered nugatory if an extension is not granted? 13 The court's power to extend the period for compliance with a statutory demand issued under s 459E of the Corporations Act is conferred by s 459F(2), in the following terms: "(2) The period for compliance with a statutory demand is: (a) if the company applies in accordance with section 459G for an order setting aside the demand: (i) if, on hearing the application under section 459G, or on an application by the company under this paragraph, the Court makes an order that extends the period for compliance with the demand - the period specified in the order, or in the last such order, as the case requires, as the period for such compliance; or (ii) otherwise - the period beginning on the day when the demand is served and ending 7 days after the application under section 459G is finally determined or otherwise disposed of; or (b) otherwise - 21 days after the demand is served." 14 The case law indicates that an application under s 459G is "finally determined or otherwise disposed of", for the purposes of s 459F(2)(a)(ii), when the judicial officer hearing the case at first instance makes final orders after hearing the application: Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85, at [9] per Phillips JA (with whom Chernov and Eames JJA agreed); Graywinter Management Pty Ltd v Deputy Commission of Taxation (1996) 22 ACSR 636, 638 per Finn J; Meehan v Glazier Holdings Pty Ltd (2005) 53 ACSR 229, at [64] per Young CJ in Eq; Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1201, at [8]-[9] per Barrett J. The possibility that "final determination" may not occur until the expiration of the time permitted for lodging an appeal from the decision at first instance, entertained by the Full Federal Court in Vista Commercial Construction Pty Ltd v Deputy Commissioner of Taxation (1997) 79 FCR 288, 297 per Burchett, Hill and Emmett JJ; and Ketrim Pty Ltd v Jaeger Corporation Pty Ltd (2003) 21 ACLC 8, at [22] per Campbell J, appears not to be supported by the other cases. 15 On this basis, the final determination of the s 459G application in this case occurred when I made orders on 4 December 2006, and consequently the seven-day time period referred to in s 459F(2)(a)(ii) has now expired. 16 The period for compliance with the statutory demand has been extended until next Monday 18 December 2006, by the order that I made under s 459F(2)(a)(i) on 4 December. It is open to me to make a further order now, under that subparagraph, if I think it appropriate to do so. The fact that the s 459G application has been dismissed is no obstacle: Graywinter Management at 638, per Finn J. But according to the plaintiffs' submission, an order extending the compliance period can be made only within the (extended) compliance period, and so if the court does not make an extension order on or before next Monday, it will be too late to do so. That, say the plaintiffs, will mean that their appeal will be rendered nugatory. 17 The plaintiffs' argument is supported by the decisions in the Buckland Products case and the Shakespeares Pie case. In the former, a Master made orders dismissing an application to set aside a statutory demand, without granting any extension of the compliance period. On appeal, Warren J (as the Chief Justice of the Supreme Court of Victoria then was) found that the appeal was misconceived, because the time for compliance with the statutory demand had expired and no extension could be granted. On further appeal, Phillips JA (with whom Chernov and Eames JJA agreed) said (at [9]) that unless the appeal was heard and determined before the expiry of the period for compliance with the demand, an extension of time for compliance would have to be obtained, for: "Without it, there could be no point in the continued prosecution of the appeal, for, the period of compliance having ended before the appeal was heard and determined, the consequence prescribed by s 459F(1) attached, with all that followed under the statute." As it was too late to obtain an extension of time, the appeal failed. 18 In Shakespeares Pie, Barrett J refused an application to amend an interlocutory process, made by the defendant to a winding up application. The proposed amendment would have introduced into the interlocutory process an application under s 459F(2)(a)(i), for an extension of the period for compliance with the statutory demand upon which the winding up application was based. He held (at [11]) that an application for an extension order would be hopeless, given that the compliance period had well and truly expired by virtue of the operation of s 459F(2)(a)(ii). 19 The plaintiffs' argument is also supported, directly though briefly, by Barrett J's decision in Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd. In that case his Honour granted an extension of time under s 459F(2)(a)(i), partly on the ground that if the extension were not granted within the compliance period, the appeal would be rendered nugatory. He referred (at [12]) to Buckland Products as a case, where "the consequences of an appeal against a s 459H order in the absence of a s 459F(2)(a)(i) extension of time are starkly illustrated". In the Buckland Products case, the absence of an extension order meant that the appeal against dismissal of an application to set aside a statutory demand was held to be misconceived, and it was dismissed on that ground. 20 The proposition that prosecution of the appeal would be pointless without an extension order is correct only if the court is unable to act after the compliance period has expired. It might appear arguable, purely on the words of s 459F(2), that it is open to the court to make an order extending the compliance period, nunc pro tunc, after its expiration. However, the weight of authority indicates that the court cannot make an extension order after the compliance period has expired. In Ketrim v Jaeger, Campbell J said (at [16]) that "once the time for compliance with a statutory demand has expired, there is no power retrospectively to extend that time for compliance". After noting the possibility that an application for an extension of time for compliance may be made to cover the time when an appeal is awaiting determination, he added (at [21]) that "if an extension of time for compliance with a statutory demand is to be in place to cover an appeal against a decision refusing to set aside the statutory demand, that extension of time must be asked for, within the time when the statutory demand has still not expired, and granted within that time". That decision was applied by Barrett J in Shakespeares Pie, at [8]. The same view was taken by the Court of Appeal of the Supreme Court of Victoria in the Buckland Products case. There Phillips JA said (at [9]) that without an extension of time (not merely an application for extension of time), there could be no point in continuing the prosecution of the appeal after the compliance period had expired. 21 Other authorities support this view, to the extent of holding that an application for an extension of the compliance period must be made within the compliance period, without expressly stating that the application must be determined within that period: Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 25 ACSR 675, 701 per French, Keifel and Sundberg JJ; Graywinter Management Pty Ltd v Deputy Commission of Taxation, at 638 per Finn J. 22 My conclusion is that the plaintiffs' submission, that their appeal from my judgment and orders of 4 December 2006 would be rendered nugatory unless an extension of the compliance period were obtained by no later than next Monday, when the period otherwise expires, is correct. What prejudice will be suffered by the plaintiffs if the extension is not granted, and by the defendants if it is granted? 23 In the course of reaching my decision that the application to set aside the statutory demand should be dismissed, I construed clause 2.1(2) as having the effect that the plaintiffs' obligation to pay $500,000 is not to be eliminated or reduced by reference to any entitlement of the plaintiffs to receive monies in connection with the building project and, a fortiori, any claim by the plaintiffs against the defendant in connection with the project (judgment, at [41]). It is open to the defendant to seek to recover the $500,000 in reliance on that construction of the clause. Although the defendant's entitlement to do so may be affected by the outcome of the plaintiffs' appeal, the plaintiffs do not seek to restrain the defendant from any such recovery action. 24 The defendant has not yet taken any recovery action (although, presumably, its claim to be paid the $500,000 will be raised by way of cross-claim in proceedings recently commenced by the plaintiffs in the Technology and Construction List), choosing instead to issue and serve a statutory demand. It is important to remember, as Barrett J pointed out in the Australian Beverage Distributors case (at [16]), that there is an important distinction between a debt recovery action and the service of a statutory demand: "A company on which a statutory demand is served is in no sense required to comply with it. It may, if it wishes, allow the statutory presumption of insolvency to arise (by not paying the demanded sum) and, if a winding-up application follows, seek to show that it is in fact in a solvent state so that a winding-up order is not justified. The statutory demand process is no more than a process that defines where the burden of proof lies in winding-up proceedings." 25 Upon proper analysis, therefore, the making of the extension order sought by the plaintiffs does not keep the defendant out of the money to which I have held it to be entitled, but merely deprives the defendant of the benefit of the statutory presumption of insolvency arising under s 459C in any subsequent winding-up proceeding. 26 On the other hand, unless an extension order is made, the plaintiffs will have to choose between paying $500,000 to the defendant by next Monday, and allowing their failure to comply with the demand to create, probably against each of them (although the question of their several liability has not been explored in argument), a presumption that they are insolvent, unless the contrary is proved. That presumption will probably be available to any creditor of either of them, who applies for winding up within the time stipulated by s 459C. In any such winding up proceeding, the relevant plaintiff (as defendant in the winding-up proceeding) will bear the burden of demonstrating solvency and will be subject to the restrictions contained in s 459S. These disadvantages will apply to the plaintiffs even if they succeed in their appeal, because under s 459C(2)(a) the presumption of insolvency arises if, during the defined period, the company fails "as defined by section 459F" to comply with a statutory demand, and under s 459F(1) the company is taken to fail to comply with the demand at the end of the compliance period if the demand is still in effect and the company has not complied with it. 27 The defendant's solicitor has given evidence that he has received instructions from his client that if the time for compliance with the statutory demand is not extended and payment is made by or on behalf of the plaintiffs on or before 18 December 2006, the defendant is prepared to undertake to the court and the plaintiffs to repay that amount if the statutory demand is ultimately set aside. There is some general evidence about the defendant's ability to comply with that undertaking. But in my opinion reliance on that undertaking is not a suitable substitute for an extension order. 28 The position in this case is analogous to the position considered by Barrett J in the Australian Beverage Distributors case. In that case his Honour declined to require, as a term of the making of an extension order, that the full sum of the statutory demand, as varied by the Master, be paid into Court. He did so on the basis that the defendants should not be given the form of priority or security that would be entailed by such a term (at [16]). In my view similar reasoning is applicable in this case. Given that a statutory demand is not an instrument for recovery of a debt, but is rather, as Barrett J remarked, a process that defines where the burden of proof lies in winding up proceedings, there is no good reason for allocating to the defendant the advantage of receipt of the amount it claims, in circumstances where the plaintiffs assert entitlements to substantially greater amounts and there is a prospect that their challenge to the statutory demand may be successful on appeal. 29 These considerations lead me to the conclusion that, weighing up as best I can the prejudice that the defendant would suffer if the extension order is made, against the prejudice that the plaintiffs would suffer if it were denied, an extension order should be made. Some additional discretionary matters reinforce that conclusion. 30 First, the plaintiffs have offered to undertake to prosecute their appeal with all due expedition. Their application for leave to appeal has already been filed. They propose the making of an extension order which will place it in the hands of the Court of Appeal to deal with any contention that the appeal is not being prosecuted with due expedition, and consequently there is a ready procedure for policing the performance of the undertaking. 31 Secondly, the grounds of appeal that have been outlined to me include some matters of significance, relating to the meaning of "offsetting claim" under s 459H and the efficacy of contractual stipulations seeking to exclude offsetting claims, and relating to whether the court should resolve questions of construction of such provisions to the normal civil standard or merely to the level of plausible contention. 32 Thirdly, it is relevant, though not particularly weighty, that the plaintiffs have initiated a proceeding in the Technology and Construction List against the defendant, making a claim in the order of $2 million. 33 Of rather more significance is the fact that according to the Superintendent's certificate issued on 19 May 2005, the defendant is required to pay the plaintiffs $590,931.32. Clause 42.1 of the building contract states that, subject to the provisions of the contract, within a specified time the Contractor (the defendant) is to pay to the Principal (the plaintiffs) an amount not less than the amount shown in the certificate as due to the Principal, "subject to any set-off for deductions the Principal may make in accordance with this Contract or otherwise at law". In Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1998) 14 BCL 215 Rolfe J held that a similarly worded clause, which excluded the quoted words, required payment of the certified amount without any deduction for amounts claimed by way of set-off or cross-claim. The plaintiffs in the present case submitted that the same construction is to be applied to clause 42.1, subject only to a concession in favour of the plaintiffs, but not in favour of the defendant, made by the addition of the quoted words. In other words, while, according to my judgment, the defendant is entitled to recover $500,000 from the plaintiffs without any reduction for offsetting claims, it is a relevant discretionary matter that under clause 42.1 the plaintiffs are entitled to recover approximately $590,000 from the defendant without any such reduction. I agree that this is a significant discretionary factor. I should also note that if an extension order is made, the plaintiffs will undertake not to seek summary judgment or issue a statutory demand for the amount of the Superintendent's certificate until the appeal is resolved. 34 I have concluded, overall, that discretionary considerations support the making of an extension order. Counsel for the defendant submitted that if I reached that conclusion, I should make an order of the kind made by Barrett J in the Australian Beverage Distributors case. There his Honour extended the time for compliance with the demand until a specified date one month after the hearing of the application for extension, on condition that the plaintiff was to make, within 7 days, an application for expedited hearing by the Court of Appeal, and diligently prosecute both the appeal and the application for expedited hearing in accordance with the rules. 35 I have decided not to make an order in those terms for two reasons. One is the practical difficulty of doing so, in circumstances where the matters come before me in the last week of term, just before the Court's long vacation. In effect, it would be necessary for me to require that the application for expedition be made in the early part of February next year. I was informed from the bar table that the return date for the application for leave to appeal is in March. Not much would be gained by making such an order. Secondly, I assume that the reason for seeking an order in those terms is to provide some assurance that the appeal will be prosecuted with all appropriate expedition. In my view, however, the order proposed by the plaintiffs contains adequate safeguards, because in its terms it empowers the Court of Appeal to make an order affecting the compliance period, if it reaches the conclusion that the plaintiffs are not adhering to their undertaking. Conclusion 36 The plaintiffs seek the following order: "The plaintiffs be granted an extension of time for compliance with the statutory demands served upon them on 23 March 2006 until the determination of appeal No 40796 of 2006 by the Court of Appeal or as otherwise ordered by the Court of Appeal, upon an undertaking by the plaintiffs to prosecute the appeal with expedition with a view to having the appeal heard on the earliest date that the Court of Appeal will allocate and upon the further undertaking that the plaintiffs will not, until after 7 days following the determination of the appeal by the Court of Appeal, seek summary judgment or issue a statutory demand in the amount of $590,931.32 the subject of the Superintendent's certificate dated 19 May 2006." 37 The proposed order has been modelled on the order considered by the Full Federal Court in the Equuscorp case, 25 ACSR at 701. Apart from the additional undertaking in the present case, the only difference is that in the Equuscorp case the applicant undertook to prosecute the appeal with expedition with a view to having the appeal heard on 10 June 1997, whereas in the plaintiffs' draft order in the present case, the undertaking is with a view to having the appeal heard on the earliest date the Court of Appeal will allocate. In my view, that difference is not significant. In the Supreme Court of New South Wales, where the allocation of appeal dates is a matter for the Court of Appeal, it seems to me that the plaintiffs' draft is preferable. In my opinion, the Full Federal Court's decision in Equuscorp, that s 459F(2)(a)(i) authorised the making of the order extracted at page 701 of the ACSR report, is applicable to the draft order in the present case. 38 Senior counsel for the plaintiffs has informed the court that his clients will give the undertakings to which the proposed order refers. He has also told the court that the effect of the first undertaking is that if the Court of Appeal offers a hearing date, the plaintiffs will be obliged to take it without regard to the convenience of counsel. 39 In the circumstances, I have decided to make that order. 40 As to the costs of the application for an extension order, I am inclined to make an order having the effect that those costs will be the plaintiffs' costs of the proceeding: so that, if the plaintiffs succeed in the appeal or in any re-hearing after the appeal, they will be entitled to their costs of this application, but if they do not succeed, then each party will bear their own costs of the application. This is because the plaintiffs have succeeded in their application, but only on the basis that they have a reasonably arguable case on appeal, a matter yet to be tested. However, I shall allow the parties to make brief submissions on costs, in case there are some considerations I have overlooked.

Jem Developments v Hansen Yuncken

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Judgment (11 paragraphs)

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Cases Cited (7)

Cited By (15)